The Price of Inequality and a Just Society

The article is based on a discussions held in Sofia on 19 March, 2014 and organized by the Institute for Market Economics and the Friedrich Naumann Foundation, in cooperation with the Libertarian club at UNWE. The text reflects the views of the author and should not be considered a summary of the discussion.

The topic of inequality is traditionally dominant among the wide public. It is an unavoidable part of every economic debate not only because of its inherent and important social significance but also because it sets the framework for the more general comprehension of economic development. The lines of separation between contemporary economists on questions like: “Why some nations succeed and others fail?”, “What caused the crisis?”, “What should be the role of the state in the recovery?”, “”Ae markets self-governed or are they inevitably distorted?” among others can almost always be attributed to a certain attitude and understanding concerning inequality in society.

This year the book of the Noble prize laureate Joseph Stiglitz “The price of inequality” reached the Bulgarian market. It presents in a very absorbing way the popular understanding of the divide and opposition between the elite (the one percent) and all the others (the 99%). In this article we will analyze the topic of inequality and the popular perception about the “failure of the markets”, thus indirectly presenting a critical glance at Stiglitz’s book.

Inequality Before the Law or Wealth Inequality

When we are talking about inequality we should always distinguish between inequality before the law and inequality in wealth or the accumulation of income. The subject of inequality suggests a certain attitude towards (in)justice and that is why such differentiation is especially important. Inequality before the law in practice is always unduly. If we proceed from the presumption that all people have unconditional rights, a different legal treatment would make people unjustifiably unequal by definition. Throughout most of the human history people haven’t been equal before the law (the right to vote in itself is a good enough example) and they lived in societies of the privileged. The attitude towards this kind of inequality shouldn’t lightly be transferred to the inequality of wealth in contemporary societies.

Inequality in wealth or income is an issue which doesn’t suggest any inherent injustice. This is the big difference. Simply put, if two people are part of a society and one of them has the right to work and earn for himself while the other one is prohibited to do so (i.e. they are unequal before the law), we can safely say that this is an unjust society. On the other hand if they are part of a society that provides them the same opportunities, and one of them earns twice as much as the other, we would hardly be in a position to make a judgment about justice and injustice. This doesn’t mean that we should neglect the data or not look for the causes of inequality in income, but rather that we cannot work with the presumption of injustice just because wealth and income are different. If there is injustice indeed, it lies somewhere deeper than the straight forward interpretation of raw data.

Although the distinction between inequality before the law and wealth inequality is widely accepted and understood, these continue to be mixed up in the popular perceptions of the contemporary society. Stiglitz does it too. From its very beginning his book subjects the reader to the authors’ perception of the inherent injustice of inequality, pointing out the “Arabic spring” as society’s answer to inequality and quickly applying this argument to the American society, the wealth of the so called “one percentage” and the market failures. However, the events in the Arab countries weren’t brought about by any market deficiencies, but by the disregard of the supremacy of law and the limitation of free initiative. Mohamed Bouazizi set himself on fire at the end of 2010 in Tunis and unleashed a wave of protests in the region after being prohibited to sell his goods on the street, i.e. his means of subsistence were taken away from him forcefully. The “Arab spring” then spread to societies where there was injustice, enforced trough the power of the government/law, and didn’t occur because of the so called “market failures”.

The Artificial Debate “Capitalism or Equality”

By focusing on the allocation of wealth and income the debate about inequality tends to be presented as an opposition between capitalism (and free markets) and some imaginary alternative which secures equality. This approach is extremely manipulative. There are no examples of human societies which have been at least to a certain extend developed and have had equality i.e. did not to have members with more wealth and material advantages. If we could travel back in time we would come across societies with gods and shamans, pharaohs, imperators, noblemen, aristocrats, totalitarian leaders, bankers and merchants and so on. In each case we have inequality – there has always been a difference between the majority of people (“the 99 percent” according to Stiglitz’s book) and the elite.

The argument “capitalism or equality” in the general sense supposes that the alternative is a form of socialism or state intervention which would lead to equality in terms of wealth and income. That is a fiction. Socialistic societies also have privileged people and that is evident not only from historical experience but also from examples around the world today. In a socialistic society the division is between the elite or the so called “nomenclature” (those involved in government) and all the others that are subject to this governance.

Photo: Wikimedia Commons

Yes, historically in socialistic societies most people could work in similar factories, inhabit similar dwellings, drive 3-4 brands of cars from a single class and seem quite “equal” overall, but the difference between them and the elite has always been significant. Leaving aside the debate whether it is possible for such a society to prosper, we can safely state that in every society, including totalitarian and socialistic ones, there is some kind of inequality – it is inherent to every social order.

What is significant is not inequality itself, but the reasons for its existence and every person’s possibilities to “bypass” it – therein resides the feeling of injustice. Note that in most societies, inequality has historically been imposed by force – not by some market-based process, but by the use of power.

The question at hand is “Can the market cause such an unjust inequality as the usage (imposition) of power?”. The debate in its essence is not “capitalism or equality”, but rather “Is capitalism fair, or do free markets fail and divide people?”

The Free Society and the Feeling of Justice

The belief in a free society should in no way be used for any kind of simplified view of inequality. The perception that we can build a perfectly free society in which everyone has equal rights and doesn’t have constrains in his or her development often neglects the very organic beginning of this society. What makes a society free or fair is not the way it’s fundamentals and institutions are put to paper, but the people’s believe in it and their desire to live in it. Such a society cannot exist if the majority thinks that something in it isn’t fair – in most cases this gives strength to populists and is the first step on the “Road to slavery”, according to Hayek.

The contemporary Western society presents us with the same conflict between the general perception of a “free society” and the floating feeling of injustice. The crisis only empowered these attitudes. Does that mean that free markets really bring injustice? It somehow seems that the classic discussion about the economic inequalities neglects that question – it observes what we call “justified differences”. What is more interesting is that where there really is inequality – whether a product of a market or state failure, we often find a form of clientelism or the so called “crony capitalism”.

The Justified Inequality and Development – a Classic Discussion.

The classic discussion about inequality in capitalism observes on one hand the differences and wealth of the elite and on the other hand – poverty. The popular thesis is that the differences are too big and ergo we have unfairness, and the opposing thesis is that this is normal and that it is actually the driving power of development. Some of people say “the rich are getting richer and the poor – poorer”, and others say “all people are better off, including the poor”. In other words, it’s not the differences that matter, but the overall improvement of everyone’s welfare. Here we come across the well-known thesis about the pie – even if you receive a smaller piece (share), if the whole pie got bigger, your chunk would get bigger too. These are the arguments which we can see in the last discussion, involving Margaret Thatcher in the parliament of the United Kingdom (1990). From this discussion came Thatcher’s famous quote that some people would prefer the poor to be poorer as long as the differences are smaller.

In the classic version of this debate, other factors put aside, Thatcher’s thesis meets significant rational support. Most people no doubt realize that a free society cannot be equal (in wealth) and there is nothing wrong with that. People are different, concentrate in various spheres, apply different effort, have different values – some want more money, others want more leisure time, some are just lucky. Nevertheless if a person wants to be free, he will surely accept that this makes life diverse, including in terms of income and wealth.

The same goes for the rational attitude towards poverty and inequality. If we are to choose between a world without poverty and a world without inequality we would most probably choose the first option. The argument that capitalism is “bad” due to the significant inequality in income and wealth which it entails, doesn’t withstand the thesis that capitalism makes societies richer and limits poverty. What’s more, the facts show that this generation lives in a world with more opportunities than ever before – if you could choose an era to live in and wanted to have a better life without knowing in which part of the world you will end up, your best choice would be to be part of today’s generation. A video by Hans Rosling presents the big picture – the world is getting richer and inequality) gradually decreases.1

The discussion which contrasts the arguments of inequality to those of poverty and development, which we named “classic”, has totally taken over the public’s attention and has set compelling barriers between (simply put) “left” and “right” intellectuals and economists. However, the dividing line doesn’t come from the logic of the market (i.e. the different remuneration), but rather from the focus on simplified theoretical settings and a wrong interpretation of the feeling of injustice, trying to explain it through the prism of a given ideology or popular deceptions, and not searching for the rational basis. In this simplified debate there is no place for the feeling of injustice – if there is such a thing, it is be declared “wrong” and attributed to misunderstanding. That is why I have the feeling that the “classic” discussion doesn’t exhaust the topic at all.

Unfair Inequality – Market failure or Clientelism

Inequality is inherent for capitalism in big dimensions – generally there is no doubt in that. There is no doubt that there is a feeling of injustice that has been rooted in the contemporary world, which was additionally intensified by the crisis, which we now call “The Big Recession”. But what provokes this feeling – the success that is deserved, or the success of the privileged? We are not questioning the injustice; we are asking if we are not rushing to conclusions by accusing free markets for this feeling?

Let’s do a mental experiment again. The popular view is that capitalism is unfair, as it leads to incredibly large distortions in wealth. Each symbol of this distortion should provoke negative emotions in us, i.e. it activates a sense of injustice. Let us now imagine Mr. Steve Jobs and Mr. Mark Zuckerberg. Both can safely say that capitalism has allowed them to earn “outrageous” amounts of money and to possess more money than entire countries. Why aren’t you angry already? How come the most emblematic examples of wealth accumulation in a capitalist society, do not cause negative feelings? Apparently the feeling of injustice is not rooted in great wealth and diversity, but in something else – how has this wealth been acquired?

Here’s the alternative – imagine two anonymous bankers who handed out loans without reason, harvested huge bonuses and at the end the state saved them. There it is – a sense of injustice, even a whole movement – “Occupy Wall Street”. The privileged position of the banker in this case is not caused by a market failure, but by a gift from the state. The monetary policy of contemporary Western “capitalist” societies is entirely controlled by the state and has nothing to do with the market. Note that the only thing that ​​the market did during the wake of the “Great Recession” was to try to destroy these very bankers – to kick them out on the street. The state saved them through the instruments of monetary and fiscal policy, which could easily be described as “the money of the99 percent”. Both the “left” and the “right” realize that bankers have been privileged. But are they aware that the market was trying to oppose them, and the state was on their side?

We can give similar examples from Bulgaria too. Imagine a successful entrepreneur, who has started from scratch, sells his goods worldwide, creates jobs and as a result of that is very rich. This hardly causes negative emotions in someone. Now imagine someone who has never created anything, but being close to power, has benefited during the transition and the privatization of publicly owned enterprizes. Here it is again – an overwhelming sense of injustice. Realizing the difference between these two examples, we can answer many questions about inequality being fair and unfair.

These examples – both domestic and foreign, come to show that the feeling of injustice is not a result of the accumulation of wealth in itself, but of something else – the privileged position of some members of society. Unjust inequalities in modern “capitalist” societies are a fact, but they are not caused by the markets, but by the so-called crony capitalism or clientelism. It is often realized in its micro form – getting an enterprise as a gift from the state, “winning” fixed public procurement procedures, receiving favorable regulation that kills your competitors or directly provides legal monopoly in a particular area. This form of micro clientelism is known, but the macro form of crony capitalism is almost always overlooked, namely – monopolistic monetary policy and deficit government spending. These two are actually the main factors enriching the one percent, disguised as “social” policies.

‘Fair’ Society

Let’s use John Rawls’s idea about the “veil of ignorance” – while behind the veil of ignorance, we can imagine a just society in which we want to live, without knowing in what role we’ll find ourselves there. The logical experiment would inevitably lead us in a free society where everyone is equal before the law, but not necessarily equal in income or wealth. A society without privileged people and artificial inequality. This society sounds very close to the notion of capitalist society and seems to be far from what we have in the modern Western world.

Interestingly, Stiglitz, while attacking capitalism in his book2, acknowledges the guilt of crony capitalism, but the decisions that he proposes lead to more government, that would inevitably create more clientelism. Moreover, his proposals to combat inequality by using monetary and fiscal policies to achieve that goal (e.g. monetary policy that would rather focus on jobs than on price stability) would virtually transfer even more power to what we call here crony capitalism. These are just the kind of policies that attempt to engineer the “desired” society and that brought the “Great Recession” and the sense of injustice.

If the main argument against wealth is that it is won on the back of ordinary people, meaning on their expense, it can only be done in several ways – by force, that is plundering and violation of the law; by rules that favor some at the expense of others; through monetary policy which channels cash flows in one direction taking a little and sometimes a lot of everybody’s money (by depreciating them along this way) ; through fiscal policy that redistributes taxpayers’ money in someone’s favor. The rich earn on the expense of the poor when there is no supremacy of law, or when there is a form of crony capitalism. Free markets do not allow this to happen.

1 In practice this means that the statement “the rich are getting richer and the poor are getting poorer” is false, which, however, far from settles the debate about just and unjust inequality.

2 Accusing capitalism of creating: ‘inequality, pollution, unemployment and… degradation of values to the extend where everything is possible and no one is responsible”; Joseph Stiglitz, “The Price of Inequality”, p. 18